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Do Kodiak's Numbers Reflect Its True Potential?

While past performances have not been impressive, the stock appears undervalued.

A few weeks back, I took a bullish look at the growth prospects of Kodiak(AMEX: KOG), focusing mainly on its expanding oil reserves in the Bakken shale play. Today, let's have a look at its financials and see if they offer some insight into where this company might be headed.

Past performanceRevenue growth in 2010 was up an impressive 175% over the previous year -- from $11.3 billion to $31.0 billion. The compounded annual revenue growth rate over the past five years is perhaps even more impressive, standing at 143%. However, in spite of its aggressive growth cycle, the company has not really managed to convert its revenues into net profit in these five years. While this is a matter of concern, I don't believe this trend will continue.

Looking into the future, because of substantial revisions in its reserves, Kodiak is bound to leave its dismal performance behind. In fact, Kodiak has actually managed to turn around its cash flow in 2010, recording a 20.1% margin in its EBITDA. Consensus estimates show that the company's EBITDA margin will grow even further, to over 70%, by the end of 2011. With no signs of abatement in global oil prices, I believe this level will be maintained for a couple of years more. And that, Fools, is what will begin to reward shareholders.

What it holds for the futureThis makes me want to take a look at its 8.7 forward P/E ratio (for the year ending 2012). We now take a look at the corresponding figure for Kodiak's competitors in the Bakken play: Denbury Resources(NYSE: DNR) stands at 18.2, while Continental Resources' (NYSE: CLR) forward P/E stands at 23.1. This shows that Kodiak's stock is possibly undervalued compared to its peers. The consensus estimate three-year PEG ratio stands at an impressive 0.21, while for Denbury and Continental the figure stands at 1.2 and 1.3, respectively. After adjusting for Kodiak's expected growth, the company appears to be even cheaper.

Foolish takeawaySmall E&P companies always run the risk of catastrophic implosion, but in this case, I'm happy to see that Kodiak is reasonably well-capitalized. The company does not carry a massive debt load. In fact, debt-to-equity stands at a manageable 13.4%.

Most new investors are happy to know that Kodiak made a smart move in raising capital through equity, rather than debt. I believe shareholders can expect a return in the next couple of years and will definitely be rewarded over the long run.

Isac Simon does not own shares of any of the companies mentioned in this article.